(The following statement was released by the rating agency)
Sept 26 - Spanish regions have reported a cumulative negative current account balance of EUR2.1bn for the first half of 2012, but VAT disbursements from the central government were only 43% of their full year allocation. Despite this shortfall, the regions have accumulated a consolidated deficit of 0.77%, about half the annual target of 1.5%. This represents a large cut from last year when the first-half deficit was EUR17.414bn or 1.64% of GDP.
The cut in VAT receipts means the regions got EUR1.9bn less than their pro-rata allocation, which could have cut the current account balance to EUR0.2bn. This figure could even have been positive had all tax income been 50% rather than the 49% received.
Tax receipts from real estate transactions declined by 18% from the first half of 2011. This reflects the slow housing market in Spain.
We expect more clarity about whether the regions will receive the outstanding 57% of their VAT allocation in the second half of the year. These payments do not represent actual tax collected but rather the central government’s estimates from autumn 2011. The two tiers of government will go through a tax settlement in 2014 to determine the final allocations.
The substantial deterioration in tax revenues after the first quarter puts the chances of meeting the full year target in doubt. The Spanish regions still need to take effective measures to meet the 1.5% deficit target for 2012, despite the first-half deficit numbers suggesting they are on track. The first quarter’s numbers include exceptional tax revenues from the 2010 tax settlement.
Meeting the fiscal target is key to restoring investors’ confidence, and in Fitch’s view, the health of the current balance is an important element in the creditworthiness of local and regional governments. In the second quarter of 2012, regions overall recorded a negative current balance of EUR4.5bn compared with a positive EUR2.4bn in the first quarter. This is positive in comparison with the first half results of 2011, which was a negative EUR6.7bn.
According to their respective economic and financial plans, the autonomous communities expected a negative current balance of EUR13.6bn, which was an element behind the downgrade of eight regions in May 2012. A similar result in the second half would make it difficult to meet the forecast.
Capital expenditure amounted to just under EUR5bn in the first half of 2012, a 39% decrease year on year. If the current balance does not improve in the second half of 2012, we could see regions putting capital expenditure projects on hold so that they comply with fiscal targets.
All the regions have attempted to reduce their deficits, but there are wide variations between them. Three regions have already exceeded the 1.5% target, namely Extremadura, Murcia and Navarre. Catalonia has reduced its deficit the most by EUR2,319m in absolute terms year-on-year. Valencia and Castile la Manche follow, with reductions of EUR1,770m and EUR1,327m respectively.
The ratings of the Spanish regions already take into account that deficit targets for the year may not be met and that further cuts in spending may be necessary. For 2013 and 2014, the central government revised in June 2012 fiscal targets with a limit of 0.7% and 0.1% respectively, and regions will have to take additional austerity measures to meet those targets.